What is a loan?
A loan is a financial transaction in which one party (the lender) agrees to give another party (borrower) a certain amount of money with the expectation of partial repayment. The terms of a loan are often specified in the form of a debtor or other contract. The lender may ask for interest payments in addition to the original loan amount (principal). The borrower must accept the repayment terms, including the amount due, interest and maturity dates. Some lenders may also award fines for missing or delayed payments.
Because a loan can contain many hidden costs such as interest payments and finance charges, many people tend to avoid applying for one until it becomes absolutely necessary. Buying a new vehicle or home almost always requires some form of financial loan, whether it be a bank mortgage or a private loan with the seller. Jean Des Esseintes of higher education may also require a federally supported student loan. Interest rates on these types of large loans can be set at the time of the application or may vary depending on the federal prime rate.
There is a very significant legal difference between a gift and a loan.
A very generous relative or friend can give you $ 5000 for car repairs, eg. If there is no expectation of repayment, the money can be considered a gift. The donor could not sue for repayment later in a civil lawsuit. However, if the lender refers to money as a loan and the borrower repays, even a dollar, the money can be considered a legal loan and the lender can claim repayment any time. Small business courts spend much of their time deciding whether or not a transaction involving money was a gift or loan. This is why paperwork is crucial when making private loans to friends or family.
Most loan applications are handled by banks or other professional lending institutions. They can use any number of criteria to determine whether a potential borrower is eligible for a loan. Past credit history is almost always considered, along with current income and wealth. The purpose of the loan can also be a factor – a documented investment opportunity may have greater appeal than an untried idea for a new restaurant. An important consideration is the income to the debt ratio of the borrower. Can the borrower afford to repay the loan with interest? Professional lenders essentially “sell” money, so borrowers must realize how much a loan really “costs” in terms of real dollars and cents.